SUMMARIES  OF 


California 
Inheritance  Tax  Act 

and  Federal 
Estate  Tax  Law 


c/C 

BLYTH,  WITTER,  &  Co. 
Publication 


SUMMARIES  OF 

Inheritance  Tax  Act 

of  California 

AND  THE 

Estate  Tax  Law 

of  the  United  States 


COMPILED  BY 

FOGEL  &  BEMAN,  Attorneys 
Los  Angeles,  California 

February,  1921 


COPYRIGHT,  1921,  BY 

BLYTH,  WITTER  &  Co. 


The  Reason  for  this 
Booklet 

THE  purpose  of  this  booklet  is  to  pass  on 
to  our  clients  information  which  we  ob- 
tained for  ourselves  and  which  we  have 
found  useful.     No  matter  how  important  a 
law  is,  it  is  often  difficult  for  most  people  to 
read  it  with  clear  understanding,  and  more 
difficult  to  read  it  with  interest. 

The  California  Inheritance  Tax  Act  and  the 
Federal  Estate  Tax  Law  are  of  importance 
and  interest  to  all  our  clients,  and  we  have 
therefore  engaged  attorneys  to  prepare  read- 
able, understandable  summaries  thereof. 

If  further  information  is  desired  as  to  any  of 
the  matters  herein  discussed,  we  assure  the 
reader  that  we  will  be  glad  to  obtain  it  for 
him. 

We  take  this  opportunity  of  thanking  Fogel  & 
Beman,  Attorneys,  who  prepared  the  following 
pages,  and  to  express  appreciation  for  cour- 
tesies shown  by  John  W.  Carrigan,  Assistant 
Inheritance  Tax  Attorney,  and  by  C.  W. 
Foote,  Estate  Tax  Deputy,  Internal  Revenue 
Office. 

BLYTH,  WITTER  £  Co. 


CHAPTER  ONE 

Distinction  Between  the  California 

Inheritance  Tax  Act  and  the 

Federal  Estate  Tax 

AT  the  outset  attention  is  called  to  the 
f-\    distinction    between    the    phrase    "In- 
heritance  Tax"  and  the  phrase  "Estate 
Tax." 

The  State  of  California  very  properly  denom- 
inates its  tax  an  "inheritance  tax."  The  tax  is 
levied  upon  the  separate  inheritance  of  each 
inheritor,  varying  both  as  to  the  rate  of  tax 
and  as  to  the  amount  of  exemption. 

On  the  other  hand,  the  Federal  tax  is  as 
clearly  designated  an  "estate  tax."  It  is  as- 
sessed against  the  net  estate,  and  the  Govern- 
ment demands  payment  from  the  executor  or 
administrator,  and  does  not  concern  itself  in 
the  least  in  the  subsequent  distribution  of  the 
estate,  nor  does  the  matter  of  relationship  in 
any  way  enter  into  consideration. 

The  California  Inheritance  Tax  Act  exacts  a 
tax  on  sums  as  low  as  five  hundred  dollars  in 
some  instances,  whereas  the  Federal  estate  tax 
makes  no  attempt  to  exact  payment  of  a  tax 
from  the  estate  of  a  resident  decedent  unless, 
after  allowable  deductions  are  made,  the  net 
estate  exceeds  fifty  thousand  dollars.  It  is 
apparent,  therefore,  that  the  state  inheritance 
tax  is  of  importance  to  a  greater  number  of 
persons  than  is  the  Federal  estate  tax. 

The  two  chapters  following  will  be  devoted  to  a 
discussion  of  the  state  tax,  and  of  the  Federal 
tax,  respectively,  each  being  accompanied  by 
appropriate  tables,  with  illustrations. 


CHAPTER  TWO 

The  Inheritance  Tax  Act  of  the 
State  of  California 

History 

THE  inheritance  tax  laws  now  in  force  in 
the  State  of  California  may  be  said  to 
have  had   their  beginning  in  the  year 
1893.     The  law  as  then  enacted  was  amended 
from  time  to  time  until  the  year  1905,  when 
the  Legislature  completely  revised  the  law  and 
passed  an  act  which  was  fundamentally  the 
same  in  principle  as  the  act  now  in  force, 
though  it  was  revised  in  the  years  1911,  1913, 
and  1917. 

The  acts  in  force  prior  to  1917  still  have  some 
application  to  cases  where  death  occurred,  or 
where  transfers  were  made  in  contemplation 
of  death,  before  the  year  1917,  but  as  such 
cases  are  comparatively  few  in  number,  and 
in  order  to  place  before  the  reader  a  brief 
statement  of  the  law  which  has  the  most 
widespread  application,  this  discussion  will 
deal  almost  exclusively  with  the  act  of  the 
Legislature  of  the  State  of  California  passed 
in  1917,  and  known  as  the  "Inheritance  Tax 
Act." 

General  Provisions 

As  implied  by  the  phrase  "Inheritance  Tax," 
the  tax  imposed  is  primarily  a  tax  upon  the 
transfer  of  property  at  the  time  of  a  person's 
death,  but  in  some  cases  the  tax  is  imposed 
upon  transfers  made  before  death.  A  list  of 
the  transfers  which  are  taxable  is  hereinafter 
set  forth;  but  before  proceeding  to  that  the 
reader's  attention  is  called  to  the  following 
facts : 


avor 


1.  The  tax  is  upon  the  transfer  of  property, 
whether  such  property  consist  of  real  estate, 
personal  property,  or  both.     It  is  also  upon 
the  transfer  of  any  interest  in  property  and 
upon  the  transfer  of  the  income  from  prop- 
erty. 

2.  The  tax  is  generally  imposed  upon  such  a  Transfer  to  a  person 

»  i       .1  •.    i_       .  .*.  or  corporation  is 

transfer  whether  it  be  to  a  person,  an  institu-  taxable 
tion,  or  a  corporation.     Some  persons,  insti- 
tutions, and  corporations  are,  however,  ex- 
empt, as  will  appear  later. 

3.  The  tax  is  upon  the  market  value  of  the  JJ*j£"J  ™xue 
property,  or  interest  transferred. 

4.  The  rates  of  taxes  are  prescribed  by  the  Rates  of  the 
act.     Hereinafter  (page  26)  appears  a  schedule 
showing  the  various  rates. 

5.  Exemptions  as  to  amount  are  granted  in  Exemptions  in  t. 
certain  cases.     For  instance,  property  of  the 

market  value  of  twenty -four  thousand  dollars, 
transferred  to  the  widow  or  to  a  minor  child 
of  the  deceased,  is  exempt  from  the  tax. 

6.  Calif ornians  are  greatly  interested  in  know-  NO  tax  upon  the 

-,       .  i  .  •.  . .  .      ,  .     community  Interest 

ing  whether  the  community -property  interest  of  the  wife 
of  the  wife  is  taxable  upon  the  death  of  the 
husband,  and  a  portion  of  the  Act  is,  for  that 
reason,  here  set  forth  in  italics: 

" .  .  .  the  one-half  of  the  community  prop- 
erty which  goes  to  the  surviving  wife  on  the 
death  of  the  husband,  ....  shall  not  be 
deemed  to  pass  to  her  as  heir  to  her  husband, 
but  shall,  for  the  purpose  of  this  act,  be  deemed 
to  go,  pass,  or  be  transferred  to  her  for  valuable 
and  adequate  consideration,  and  her  said  one- 
half  of  the  community  shall  not  be  subject  to 
the  provisions  of  this  act  .  .  . " 

A  further  discussion  of  the  act  with  reference 
to  community  property  appears  at  page  15  of 
this  pamphlet. 


Taxable  Transfers 

Transfers  are  taxable  as  to  the  amount  of  the 
market  value  of  the  property,  in  excess  of  the 
exemptions  granted,  when  the  transfers  are 
effected  in  any  of  the  following  cases : 

When  !5T  ^™8ee-  1  •  When  a  person  dies  while  a  resident  of  this 

•  i    •     i         •  •  • 

resident  state,  leaving  property  which  is  situated  in 
this  state  or  elsewhere,  and  which  is  trans- 
ferred by  will  or  by  provisions  of  the  laws  of 
this  state  to  any  person,  institution  or  cor- 
poration, no  matter  where  the  recipient  of  the 
property  resides  or  is  located. 

when  the  deceased  2.  When  a  person  dies  while  not  a  resident  of 

i    •  ••  •  •'••i* 

resident  this  state,  leaving  property  within  this  state 
which  is  transferred  by  will  or  by  provisions 
of  the  laws  of  this  state  to  any  person,  institu- 
tion or  corporation,  no  matter  where  such 
recipient  person,  institution  or  corporation 
resides  or  is  located. 

dlnatninfecontemr^fal  3.  When  a  person,  during  his  life  time,  and 
intendLfto'take  while  a  resident  of  this  state,  transfers  property 

effect  after  death    whjcn    Jg    {n    thlS    State    OT    elsewhere,    by    deed, 

grant,  bargain,  sale,  assignment  or  gift,  with- 
out valuable  and  adequate  consideration,  if 
such  transfer  is  made  in  contemplation  of 
death  of  the  person  making  such  transfer,  or 
is  intended  to  take  effect  in  possession,  or 
enjoyment,  at  or  after  such  death. 

:  4.  When  a  person  during  his  life  time,  and 
while  not  a  resident  of  this  state,  transfers 
death  pr0perty  which  is  within  this  state  by  deed, 
grant,  bargain,  sale,  assignment  or  gift,  with- 
out valuable  and  adequate  consideration,  if 
such  transfer  is  made  in  contemplation  of 
death  of  the  person  making  the  transfer,  or 
is  intended  to  take  effect  at  or  after  such  death. 
"Adequate  consideration,"  as  used  in  the  act, 


means  a  "consideration  equal  in  money  or  in 
money's  worth  to  the  full  value  of  the  property 
transferred." 

Subdivision  Four,  Section  Two,  of  the  act 
reads  as  follows : 

"The  words  'contemplation  of  death/  as 
used  in  this  act,  shall  be  taken  to  include 
that  expectancy  of  death  which  actuates  the 
mind  of  a  person  on  the  execution  of  his 
will,  and  in  nowise  shall  said  words  be  lim- 
ited and  restricted  to  that  expectancy  of 
death  which  actuates  the  mind  of  a  person 
making  a  gift  causa  mortis*  and  it  is  hereby 
declared  to  be  the  intent  and  purpose  of  this 
act  to  tax  any  and  all  transfers  which  are 
made  in  lieu  of  or  to  avoid  the  passing  of 
property  transferred  by  testate  or  intestate 
laws." 

Whether  a  transfer  will  be  held  to  be  made  in 
contemplation  of  death  depends  upon  the 
facts  present  in  each  individual  case.  The 
length  of  time  between  the  date  of  the  transfer 
and  the  date  of  death  may  be  long  or  short, 
and  though  it  may  be  considered  as  one  of 
the  facts  in  the  case,  still  it  is  not  alone  deter- 
minative of  the  question  as  to  whether  or  not 
a  certain  transfer  was  made  in  contemplation 
of  death.  A  tottering  old  man  is  told  by  his 
physician  that  he  has  but  a  few  days  to  live. 
He  goes  home  and  makes  a  deed  of  all  his 
property  to  his  daughter.  He  gives  the  deed 
and  the  property  to  her.  Despite  his  own 
expectations  and  those  of  his  physician,  he 
does  not  die  in  a  few  days,  but  continues  to 
live  five  or  six  years  longer,  when,  finally,  he 
succumbs.  In  such  a  case  the  transfer  would 
undoubtedly  be  held  to  have  been  made  in 
contemplation  of  death,  though  five  years  or 

*A  gift  causa  mortis  is  one  which  is  made  in  contemplation,  fear  or  peril  of  death  and 
with  intent  that  it  shall  take  effect  only  in  case  of  the  death  of  the  giver. 


more  elapsed  before  death.  On  the  other 
hand,  a  vigorous  man  of  fifty  years,  having 
every  prospect  of  living  many  years,  decides 
to  give  his  son  a  share  in  his  business  so  that 
the  son  will  take  an  active  interest  in  his  work. 
The  papers  for  the  transfer  are  signed  and 
delivered  by  the  father  to  the  son,  and  the 
father  thereupon  leaves  the  office  for  the 
golf  links,  but  before  he  reaches  the  street  he 
is  injured  and  dies  as  the  result  of  an  elevator 
accident.  The  transfer  in  that  case  would 
doubtless  be  held  not  to  have  been  made  in 
contemplation  of  death,  even  though  death 
followed  within  a  brief  moment  of  the  time 
of  transfer. 

**.  Whenever  property,  real  or  personal,  is  held 
jn  joint  tenancy  or  is  deposited  in  banks  or 
other  institutions  or  depositaries  in  the  joint 
names  of  two  or  more  persons,  and  payable 
to  either  or  the  survivor  upon  the  death  of 
one  of  them,  the  right  of  the  survivor,  or 
survivors,  to  immediate  possession  is  deemed 
a  transfer  under  the  act,  and  is  taxable  as 
though  the  deceased  owned  all  of  the  property 
at  the  time  of  death,  excepting  therefrom  such 
portion  of  the  joint  property  as  originally 
belonged  to  the  survivor,  or  survivors.  For 
example:  Smith  had  seven  hundred  dollars 
of  his  own  money;  Jones  had  three  hundred 
dollars  of  his  own  money,  and  it  was  agreed 
between  them  that  they  should  purchase,  as 
joint  tenants,  a  bond  worth  one  thousand 
dollars.  The  bond  was  so  purchased,  and 
continued  to  be  held  by  them  in  equal  shares, 
the  interests  of  both  uniting  to  form  one 
ownership,  and  each  in  the  event  of  the  prior 
death  of  the  other  having  right  to  immediate 
possession  and  ownership  of  the  whole  bond. 
Smith  dies  and  Jones  is  entitled  to  immediate 
possession  and  ownership.  Nevertheless, 

10 


under  the  terms  of  the  act,  his  right  of  pos- 
session is  deemed  a  transfer.  He  proves  that 
three  hundred  dollars  was  contributed  by  him 
and  that  no  part  of  the  three  hundred  dollars 
was  ever  the  property  of  Smith.  If  the 
market  value  of  the  bond  at  the  date  of 
Smith's  death  is  one  thousand  dollars,  a  tax 
must  be  paid  on  the  transfer  as  to1  the  seven 
hundred  dollars  which  Jones  did  not  originally 
contribute.  (For  simplicity,  it  has  been  as- 
sumed that  no  exemption  from  the  tax  exists 
in  Jones'  favor.) 

6.  There  are  three  additional  forms,  or  kinds,  Additional  transfers 

„  i    '          i  i         i   •    i  named  in  the  act 

or  transfers  named  in  the  act,  and  which  are 
subject  to  the  tax  provisions;  but  as  they  are 
unusual  and  more  or  less  technical,  space  will 
not  here  be  devoted  to  their  discussion.  They 
are:  transfers  by  power  of  appointment;  trans- 
fers to  executors  in  excess  of  reasonable  com- 
pensation; and  transfers  made  subject  to 
charge  determined  by  death. 

7.  The  state  does  not  exact  a  tax  on  money  Life  insurance  not 

.  •>     subject  to  tax  by 

paid  by  a  lite  insurance  company  on  a  policy  «tateiaw 
insuring  the  life  of  the  deceased. 

Transfers  Aggregated 

When  more  than  one  taxable  transfer  is  made 
to  one  person  the  tax  is  imposed  upon  the 
aggregate  market  value  of  all  of  the  property 
so  transferred. 

Exemptions 

The  amount  of  exemption  existing  with  re- 
spect  to  each  person  is  clearly  shown  in  the 
schedule  on  page  26  hereof,  but  for  the  reader 
who  prefers  narrative  form,  the  following 
statement  of  exemptions  is  given. 

Certain  exemptions  are  allowed  in  each  case, 
and  are  based  upon  the  market  value  of  the 
property  transferred. 

11 


widow.  «em£tj«B  The  widow  takes  her  one-half  of  the  com- 
munity property  free  of  the  tax,  and  in  addi- 
tion, twenty-four  thousand  dollars  of  the  sum 
which  she  receives  from  her  husband  is  ex- 
empt from  taxation. 

exem%no°n  S.'OM  Twenty-four  thousand  dollars  transferred  to 
a  minor  child  of  the  deceased  is  exempt. 

Eieibandonchiid"en  Ten  thousand  dollars  is  exempt  when  trans- 
ferred  to  the  husband,  a  father  or  mother,  a 
grandfather  or  grandmother,  an  adult  son  or 
adult  daughter  or  a  grandchild.  An  adopted 
child,  or  a  child  who  stood  in  mutually  ac- 
knowledged relation  of  child  of  the  deceased 
person,  may  come  within  this  class  under 
conditions  set  forth  in  the  act. 

Two  thousand  dollars  is  exempt  when  trans- 
ferred  to  a  brother,  sister  or  descendant  of  a 
brother  or  sister,  a  daughter-in-law,  or  the 
husband  of  a  living  daughter. 

One  thousand  dollars  is  exempt  when  trans- 
ferred to  an  uncle  or  an  aunt  or  to  a  descendant 
of  either  an  uncle  or  an  aunt. 

Five  hundred  dollars  is  exempt  when  trans- 
ferred to  any  relative  not  included  in  any  of 
the  foregoing  exemptions,  or  when  transferred 
to  a  person  not  related  by  blood  or  adoption 
to  the  deceased,  or  to  a  corporation. 

prOperty  transferred  to  charitable  institutions, 
or  to  other  institutions  exempted  from  taxa- 
tion, is,  under  conditions  named  in  the  act, 
exempt  from  inheritance  tax. 

Rates  of  Taxation 

A§  m{^  be  expected,  the  rates  of  taxation 
established  by  the  act  are  more  favorable  to 
the  close  relative  than  to  the  more  distant 
relative  or  stranger.  The  rates  are  sliding— 
that  is,  they  increase  with  the  increasing 

12 


Dl* 


Rate.  rary. 


amount  transferred.  For  a  clear  understand- 
ing of  the  rates,  it  again  becomes  necessary  to 
make  reference  to  the  schedule  appearing  at 
page  26. 

Administrative  and  Enforcement 
Provisions 

A  large  portion  of  the  act  deals  with  the  man- 
ner of  arriving  at  the  value  of  property  trans- 
ferred and  with  the  manner  of  enforcing  the 
collection  of  the  tax.  No  attempt  will  here 
be  made  to  go  into  the  details  of  these  admin- 
istrative and  enforcement  measures,  except  to 
state  briefly  some  of  the  provisions  which  are 
believed  to  be  of  interest  to  the  reader,  and 
which  are  as  follows  : 

The  tax  becomes   due  and  payable   at  the  ofTheeftaxpayment 
death   of  the   deceased  person,   and   if  paid 
within  eighteen  months  no  interest  will  be 
charged;  if  paid  within  six  months  a  rebate  of 
five  per  cent  is  allowed. 

A  penalty  is  provided  for  a  failure  to  pay  the  Penalty  for  mm- 

.    i   .  .    i  IP  i          1  e    Payment  o*  t«e  tax 

tax  within  eighteen  months  alter  the  date  ot 
death.  In  some  cases,  particularly  where 
transfers  have  been  made  before  death  and  in 
contemplation  of  death,  and  where  such  trans- 
fers were  not  disclosed  for  a  long  time  after 
death,  the  penalty  has  been  made  very  severe. 

Taxes  are  based  upon  the  value  of  the  property  value  of  property 
transferred  as  of  the  date  of  the  death  of  the 
deceased  person. 

The  taxes  are  declared  to  be  a  lien  upon  the  Lr£ne°"  the 
property   passed    or    transferred    until    paid. 
Provision  is  made  for  the  return  of  overpay- 
ments made  under  certain  conditions  set  forth 
in  the  act. 

Administrators,  executors  or  trustees  are  re-  Administrators 

,  .      .     '  .  »i  f 

quired  to  deduct  the  amount  or  the  tax  from 
any  money  or  property  subject  to  the  tax,  and 

13 


executors 


of  deceased 


a  method  is  provided  for  the  sale  by  the  execu- 
tors, administrators  or  trustees  of  so  much  of 
the  property  of  the  deceased  person  as  will 
enable  them  to  pay  the  tax,  the  sale  to  be 
made  under  existing  provisions  of  law. 

The  State  Controller  is  authorized,  when  he 
records,  etc.  Delieves  that  a  tax  is  due  under  the  provisions 
of  the  act,  to  inspect  such  books  and  records 
as  he  shall  have  reason  to  believe  relate  to  or 
evidence  the  taxability  of  the  transfer. 

A  corporation  existing  under  the  laws  of  this 
state  fe  prohibited  from  transferring  on  its 
books,  or  issuing  a  new  certificate  for,  any 
shares  of  capital  stock  belonging  to  or  standing 
in  the  name  of  a  deceased  person,  or  standing 
in  the  joint  names  of  the  deceased  person  and 
one  or  more  other  persons,  without  the  written 
consent  of  the  proper  state  official. 

Safe  deposit  companies,  trust  companies, 
banks  and  other  institutions  and  persons  hav- 
ing in  their  possession,  or  under  their  partial 
control  or  custody,  securities,  deposits  or 
assets  belonging  to  or  standing  in  the  name 
of  a  deceased  person,  or  in  the  joint  names  of 
such  deceased  person  and  one  or  more  other 
persons,  are  prohibited  from  delivering  or 
transferring  the  same  to  executors,  adminis- 
trators, agents,  attorneys,  etc.,  unless  the 
proper  state  officials  are  first  notified. 

Inher!S?i  The  act  authorizes  the  State  Controller  to 
appoint  one  or  more  persons  in  each  county 
in  the  state  to  act  as  Inheritance  Tax  Ap- 
praisers in  their  respective  counties. 

Powers  are  vested  in  the  properly  appointed 
Inheritance  Tax  Appraiser  to  require  the 
attendance  before  him  of  the  executors  or 
administrators  of  estates,  or  of  any  other  per- 
sons whom  he  believes  to  possess  knowledge 

14 


of  M8etc8eo"f 


i 


of  the  estate  or  knowledge  of  any  property 
transferred  by  the  decedent  within  the  mean- 
ing of  the   act,   and   proper   authorities   are 
authorized  to  bring  an  action  in  court  to  have 
the  amount  of  the   tax  determined   and  to 
enforce  its  collection,  and  such  action  may  be  Ivaen™houbgeheSoorc 
instituted  even  though  no  probate  proceedings  £e  pe*ndkigcee 
are  pending. 

Community  Property 

The  system  known  as  the  "Community -Prop-  community- 

»j  -i       •        /^    1'£  '  A     •  property 

erty  system  prevails  in  California,  Arizona,  system 
Louisiana,  New  Mexico,  Nevada,  Texas,  and 
Washington.  In  order  that  the  reader  may 
understand  the  application  of  the  state  inherit- 
ance tax  act  to  community  property  it  is 
deemed  advisable  to  discuss  that  subject  some- 
what in  detail. 

The  following  statements  are  made  on  the 
assumption  that  the  husband  and  wife  con- 
tinue to  live  together  after  marriage. 
A  husband  and  wife  may  hold  property  as 
joint  tenants,  tenants  in  common,  or  as  com- 
munity property.  If  they  hold  property  as 
joint  tenants  or  as  tenants  in  common,  they 
hold  the  same  just  as  any  two  individuals 
might,  and  irrespective  of  their  marriage  rela- 
tion; but  community  property  is  dependent 
upon  the  existence  of  the  marriage  relation- 
ship. 

Community  property  is  defined  by  our  law  as  c£g££dunityproperty 
"property  acquired  by  husband  and  wife,  or 
either,  during  marriage,  when  not  acquired  as 
the  separate  property  of  either." 

Property  of  the  wife,  owned  by  her  before  separate  property 

r»       *  ,      .,  I'll  •  ff±          of  the  wife, 

marriage,  and  that  which  she  acquires  alter  defined 
marriage  by  gift,  bequest,  devise  or  descent, 
with  the  rents,  issues  and  profits  thereof,  is 
her  separate  property,   and  over  the  wife's 
separate  property  the  husband  has  no  control. 

15 


TXTnd  All  property  owned  by  the  husband  before 
defined  marrjage>  an(j  that  acquired  afterwards  by 
gift,    bequest,    devise   or   descent,    with   the 
rents,  issues  and  profits  thereof,  is  his  separate 
property. 

Generally  speaking,  the  wife  has  no  control 
over  the  separate  property  of  her  husband, 
excepting  that  provisions  of  law  make  the  hus- 
band liable  for  the  support  and  maintenance 
of  his  wife. 

illustration  por  illustration,  let  us  assume  that  Jane  Roe 
has  earned  money  and  purchased  a  piece  of 
land  before  her  marriage,  and  that  John  Doe 
had  one  thousand  dollars  in  the  bank  prior 
to  the  date  on  which  he  married  Jane  Roe. 
After  the  marriage  John  works  and  earns  five 
hundred  dollars  per  month.  Jane  gives  music 
lessons  and  earns  twenty  dollars  per  month. 
John's  father  gives  him  a  house  and  lot. 
Jane's  brother  dies,  and  by  his  will  Jane  is 
left  two  thousand  dollars  in  bonds.  Under 
the  law,  as  above  defined,  the  lot  which  Jane 
owned  before  her  marriage,  and  any  moneys 
which  are  later  received  from  the  rental  or 
sale  (including  the  profits)  of  the  lot,  continue 
to  be  Jane's  separate  property.  The  one 
thousand  dollars  which  John  owned  before  his 
marriage,  with  the  interest  it  earns,  continues 
to  be  John's  separate  property,  whether  he 
buys  bonds  with  it  or  whether  he  leaves  it  in 
the  form  of  cash.  John's  salary  and  the 
money  earned  by  Jane  in  giving  music  lessons 
after  their  marriage  constitute  community 
property,  and  if  invested,  any  earnings  re- 
sulting from  such  community  property  like- 
wise continue  to  be  community  property. 
The  house  and  lot  given  to  John  by  his  father, 
and  any  rents  collected  on  account  of  it, 
continue  to  be  John's  separate  property.  The 
two  thousand  dollars  in  bonds  left  to  Jane  by 

16 


lifornia 


her  brother,  and  all  of  the  interest  collected 
on  the  said  bonds,  are  Jane's  separate  prop- 
erty. 

It  is  contended  by  the  Inheritance  Tax  Attor-  where  man  and 

.„,          j7  ,  i        •  c      i  •          •  i  move  to  Califor 

ney  that,  it  a  husband  and  wile  Jive  in  another  |ctqeuir>Idperty  l8 

state  and  move  to  California,  the  mere  mov- 

ing to  this  state  does  not  make  the  past  earn- 

ings   of    the   husband   community   property, 

but  if  they  were  considered  as  separate  prop- 

erty in  the  state  from  which  they  came,  such 

earnings  continue  to  be  his  separate  property 

after  arrival  in  this  state.  But  this  contention 

is  doubtful  in  view  of  another  statute.    The 

question  is  now  before  the  Supreme  Court  of 

California  for  determination. 

Under  the  law  as  it  now  stands  the  wife  is  wife  takes  one-half 

•    11  i          f       i         i          i  i  community 

entitled,  upon  the  death  or  the  husband,  to  property 
one-half  of  the  community  property. 

The  following  rules  are  set  forth  to  indicate  Rules  for  disposition 

.    .  .-.-I    i  IP  •  of  community 

what  disposition  will  be  made  or  community  property 
property  upon  the  death  of  either  the  wife  or 
the  husband  : 

1.  Upon  the  death  of  the  wife,  the  entire  com-  Husband  takes  aii 

.  .  .  ,  ••  i       •     •    .         .  .  i  upon  death  of  wife 

mumty  property,  without  administration,  be- 
longs to  the  surviving  husband  and,  generally 
speaking,  the  wife  has  no  power  to  dispose  of 
her  interest  in  the  community  property  by  the 
making  of  a  will  or  otherwise. 


2.  Upon  the  death  of  the  husband,  one-half 
of  the  community  property  goes  to  his  sur-  deat!l 
viving  wife  and  the  other  one-half  is  subject 
to  the  disposition  of  the  husband  by  will.  If 
the  husband  leaves  no  will,  one-half  of  the 
community  property  passes  to  his  wife  by  law 
and  the  remaining  one-half  goes  to  his  children, 
or  to  the  offspring  of  such  children.  If  the 
deceased  husband  has  made  no  disposition  of 
the  one-half  of  the  community  property  which 

17 


is  subject  to  his  disposition  by  will,  and  if  he 
Oneit1ftoc8ytowhi«  leaves  no  children,  or  offspring  of  such  children, 
if ^any  tnen  the  said  one-half  of  the  community  prop- 
erty is  subject  to  distribution  in  the  same 
manner  as  though  it  were  the  separate  prop- 
erty of  the  deceased  husband.  However,  in 
any  event,  at  least  one-half  of  all  of  the  com- 
munity property  is  distributed  to  the  sur- 
viving wife  upon  the  death  of  the  husband, 
although  it  must  be  understood  that  all  of 
such  community  property  is  subject  to  the 
debts  of  the  husband  and  to  the  expenses  of 
administration. 

Inheritance  Taxes  in  Other  States 

It  is  not  the  purpose  of  this  pamphlet  to  dis- 
cuss in  detail  the  inheritance  tax  provisions 
prevailing  in  states  other  than  California,  nor 
to  make  any  defense  of  the  provisions  of  the 
law  of  this  state;  but  it  may  not  be  amiss  to 
inform  the  reader  that  Arizona,  Florida  and 
South  Carolina  are  the  only  three  of  the 
United  States  which  have  failed  to  pass  in- 
heritance tax  acts.  Neither  Alaska  nor  the 
District  of  Columbia  has  an  inheritance  tax 
act. 

An  examination  of  the  rates  of  tax  applied  in 
the  various  states  will  show  that  in  nearly  all 
instances  the  tax  rates  themselves  are  lower 
than  the  rates  applied  by  the  California  law, 
but  this  does  not  mean  that  the  State  of 
California  realizes  or  collects  more  in  inherit- 
ance taxes  than  do  other  states.  On  the  con- 
trary, the  taxes  collected  in  this  state  are  low 
as  compared  with  the  collections  in  most  other 
states.  This  is  because  of  the  liberal  exemp- 
tions granted  by  the  laws  of  California.  To 
illustrate:  A  widow,  under  the  laws  of  New 
York  State,  has  an  exemption  of  only  five 
thousand  dollars,  whereas  in  this  state  a  widow 

18 


may  take  twenty -four  thousand  dollars  exempt  Though  rates  are 

»        J  ,.  i     •  IT,-  •  higher  In  California. 

from  taxation,  and  in  addition  may  receive  tax  is  less 
what  is  known  as  her  one-half  of  the  com- 
munity property  free  from  the  tax.  In  other 
words,  though  the  rates  be  higher  in  the  state 
of  California  than  in  most  of  the  other  states, 
the  actual  tax  payment  upon  an  estate  in 
California  will  be  considerably  less  than  the 
tax  paid  on  estates  of  equal  size  in  most  other 
jurisdictions. 

Suggestion 

In  many  instances  the  estates  of  residents  of 
California,  who  have  died  here  leaving  per-  Cali( 
sonal  property  located  in  other  states,  have 
been  compelled  to  pay  an  inheritance  tax  on 
such  personal  property,  both  in  California  and 
in  the  other  states  where  the  personal  property 
was  located.  It  has  been  contended  that  this 
constitutes  so-called  "double  taxation;"  but  a 
contrary  ruling  has  been  made,  and  it  therefore 
seems  advisable,  in  most  instances,  for  resi- 
dents of  California,  insofar  as  practicable,  to 
keep  all  of  their  personal  property,  such  as 
stocks,  bonds,  moneys,  etc.,  in  this  state. 


19 


CHAPTER  THREE 

The  Federal  Estate  Tax 

Tax  on  estates  of  fT^HE  Federal  Estate  Tax  is  one  imposed 

persons  owning     '  i         s-*t  p      i         TT     •         i    ri 

property  in  u.  s.  by  the  Government  01  the  United  states 

at  time  of  death  *  _  .  .     . 

upon  the  estate  ot  every  person  dying 
after  September  8,  1916,  who,  at  the  time  of 
his  death,  resided  in  the  United  States,  the 
Territories  of  Alaska  or  Hawaii,  or  the  Dis- 
trict of  Columbia,  or  who  owned  any  property 
situated  in  any  of  those  places. 

Cn!ozteS8facptOT  The  statute  takes  no  account  of  citizenship, 

but  prescribes  different  rules  for  residents  and 

non-residents.    For  instance,  an  exemption  of 

$5«.oooEu£?npesta1tM  fifty  thousand  dollars  is  granted  to  the  estate 

of  resident  decedent  of  a  person  wno  was  a  resident  of  the  United 

States  at  the  time  of  his  death,  but  no  such 
exemption  exists  in  favor  of  the  estate  of  one 
who  at  the  time  of  death  was  a  non-resident. 
Estates  of  persons  dying  in  the  military  service 
are  exempt  under  certain  conditions. 


Jt  ls  believed  that  this  booklet  will  be  most 
of  resident  decedents  generally  read  by  persons  who  wish  to  inform 
themselves  as  to  the  effect  of  the  law  on 
estates  of  residents  —  that  is,  persons  who 
lived  in  the  United  States  before  death,  with- 
out any  present  intention  of  moving  away. 
Therefore,  no  attempt  will  here  be  made  to 
discuss  in  detail  the  application  of  the  act  to 
estates  of  non-residents,  but  effort  will  be 
directed  to  giving  a  brief  statement  of  the 
general  principles  prevailing  in  the  usual  and 
ordinary  cases  of  persons  dying  while  residing 
in  the  United  States. 


^fte'r  allowable  The  tax  is  imposed,  at  rates  fixed  by  law,  upon 

8  the  transfer  of  the  "net  estate"  of  the  de- 

ceased person.     The   "net  estate"   is  deter- 

20 


mined  by  subtracting  authorized  deductions 
from  the  entire  estate,  called  in  the  act  the 
"gross  estate." 

It  is  of  first  importance,  therefore,  to  deter-  cross  estate  includes 

,  .  i_        •        1      j     j      •  •     •  .     a11  Property 

mine  what  is  to  be  included  in  arriving  at 
the  amount  of  the  gross  estate.  Generally 
speaking,  the  gross  estate  is  determined  by 
taking  the  total  value,  at  the  time  of  the  de- 
ceased person's  death,  of  all  property  trans- 
ferred, including  the  following: 

1.  Real    property    situated    in    the    United 
States,  or  any  interest  in  such  property  of 
whatever  nature,  including  present  or  future 
interests  in  such  property; 

2.  Personal    property,    of    whatever    nature,  Personal  property 

»         r      f.        */'TT.        .„,  ,  or  interest  therein 

whether  situated  in  the  United  btates  or  else- 
where, including  a  present  or  future  interest 
in  such  property; 

3.  The  interest  of  the  surviving  wife  or  hus-  community  property 

,,.,.,.,  f  1       £          not  exempt  under 

band,  existing  by  virtue  or  a  statute,  such,  tor  Federal  Law 

....  *j.l_  '£          (See  foot  note  page  22) 

instance,  as  the  community  interest  01  the  wire 
created  by  California  statute; 

4.  Property  transferred  by  the  deceased  before 
death  and  in  contemplation  of  death ; 

Transfers  before 

5.  Property,  transfer  of  which  is  made  during 
the  lifetime  of  the  deceased  and  which  is  in- 
tended to  take  effect  in  possession  or  enjoy- 
ment at  or  after  death; 

6.  Property  held  jointly  by  the  deceased  and  Joint  property 
any  other  person,  to  the  extent  of  the  de- 
ceased's interest  therein; 

7.  Any  life  insurance  payable  to  the  estate, 
and  not  to  an  individual; 

8.  Life  insurance  payable  to  individuals  other  ™'« i«suranceK?ver 

,  "^  «*    .     .  i  $40,000  is  taxable 

than  executors  or  administrators,  to  the  extent 
that  it  exceeds  forty  thousand  dollars; 

21 


9.  Property  passing  under  what  is  known  in 
law  as  a  "power  of  appointment"  is  also  in- 
cluded, but  as  such  a  transfer  is  not  considered 
as  ordinary,  space  will  not  be  devoted  to  a 
further  discussion  of  it. 

The  community  interest  to  which  a  wife  suc- 
cee(js  UpOn  the  death  of  her  husband  is  taxable 
under  rulings  which  have  been  made  by  the 
Treasury  Department  in  construing  the  pro- 
visions of  the  Federal  Estate  Tax  Law.  Some 
experts  are  of  the  opinion  that  such  a  ruling 
is  inconsistent  with  other  regulations  of  the 
Department.  Nevertheless,  at  the  present 
time  it  is  required  that  all  of  the  community 
property  be  included  in  the  husband's  gross 
estate.* 

Whether  or  not  a  transfer  made  during  the 
lifetime  of  the  deceased  was  made  in  contem- 
plation of  death  depends  upon  the  facts  in  any 
given  case,  and  is  to  be  determined  in  very 
much  the  same  manner  as  that  used  in  con- 
struing the  California  statute  which  deals  with 
the  same  subject.  (See  page  9  hereof.) 

Property  held  jointly  by  the  deceased  and  one 
or  more  other  persons  is  taxed  to  the  extent  of 
the  interest  contributed  by  the  deceased,  just 
as  is  the  case  under  the  California  law.  (See 
page  10  hereof.) 

Life  insurance,  it  will  be  noted,  under  certain 
nsurance  con(jitions  is  taxable  by  the  Federal  Govern- 
ment, though  not  taxable  under  the  California 
law.  Some  eminent  authorities  have  ques- 
tioned the  constitutionality  of  the  provision 
of  Federal  law  taxing  life  insurance,  but  to  the 
present  time  no  successful  attack  has  been 
made  against  it. 

•  On  January  3rd,  1921,  Judge  Rudkin  of  the  United  States  District  Court  at  San 
Francisco,  filed  an  opinion  in  the  case  of  Blum  vs.  Wardell.  holding  that  the  com- 
munity interest  of  the  wife  in  her  husband's  estate  is  not  taxable  even  under  the 
Federal  law.  Whether  this  ruling  will  be  approved  by  the  Treasury  Department 
or  by  the  higher  courts  remains  to  be  seen. 

22 


It  is  immaterial  whether  the  property  is  trans- 
ferred  by  the  laws  of  inheritance  or  by  the  will 
of  the  deceased  person;  the  tax  is  imposed  on 
the  transfer  of  the  entire  net  estate,  not,  as 
under  the  California  law,  upon  any  particular 
distributive  share  thereof.  The  value  of  the 
separate  interests,  and  the  relationship  of  the 
beneficiary  to  the  deceased  person,  have  no 
bearing  upon  the  question  of  liability  or  the 
amount  of  the  tax. 

After  the  value  of  the  gross  estate  is  deter-  Grow  estate  less 

.  MIII  i    deduction  equals 

mined  in  the  manner  prescribed  by  law  and  net  estate 
according  to  official  regulations,  the  next  step 
is  to  determine  the  value  of  the  "net  estate" 
by   deducting   certain   amounts   specified   by 
law. 

Since  materially  different  rules  as  to  deduc-  Discussion  to  aPPiy 

.,  'iiii      where  death  occurred 

tions  and  as  to  rates  or  tax  prevail  where  death  after  February  24, 
occurred  prior  to  February  25,  1919,  it  will 
be  assumed,  for  convenience,   that  our  dis- 
cussion deals  only  with  those  cases  where  the 
deceased  died  on  or  after  that  date. 
In  the  case  of  the  estates  of  residents,  the  act 
permits  the  following  deductions  to  be  made 
from  the  entire  gross  estate,  wherever  the  same 
may  be  situated: 

1.  Funeral  expenses;  au0Vlideductlon" 

2.  Administration  expenses — that  is,  probate 
court  fees,  administrators'  or  executors'  fees, 
etc.; 

3.  Claims  against  the  estate,  such  as  claims 
for  money  owed  from  the  deceased  to  another; 

4.  Unpaid  mortgages; 

5.  Losses  from  casualty  or  theft; 

6.  Support  of  persons  actually  dependent  upon 
the  deceased,  and  if  ordered  by  a  court  having 
jurisdiction  over  the  estate; 

23 


7.  Property  derived  from  the  estate  of  a  prior 
decedent  who  shall  have  died  after  October  3, 
1917,  and  from  which  prior  decedent's  estate 
an  estate  tax  has  been  collected  under  the 
Revenue  Act  of  1917  or  that  of  1918; 

8.  Gifts,  by  will  of  the  deceased  to  incorpo- 
rated religious,  charitable  and  similar  institu- 
tions ; 

9.  Specific   exemption   fixed   by   the   act   at 
$50,000. 

The  law  itself,  and  the  regulations  of  the 
Treasury  Department,  generally  make  it  neces- 
sary, in  order  to  obtain  the  deductions,  to 
bring  the  desired  reduction  within  one  of  the 
items  specifically  described. 

Administrative  and  Enforcement 
Provisions 

Reports  required  \vithin  a  period  of  sixty  days  after  death, 
executors  or  administrators  are  required  to  file 
with  the  Collector  of  Internal  Revenue  a 
notice,  upon  a  form  supplied  by  the  Govern- 
ment, and  within  one  year,  unless  time  is 
extended  by  the  proper  authority,  a  final 
report  or  return  must  be  made  upon  a  regula- 
tion form.  The  return,  so-called,  must  supply 
accurate  information  as  to  the  character  and 
value  of  the  property  owned  by  the  deceased, 
or  in  which  he  had  an  interest,  at  the  time  of 
his  death,  together  with  details  of  transfers 
made  before  death,  where  such  transfers  might 
be  taxable  under  the  law. 

Rigid  rules  are  enforced  and  severe  penalties 
may  be  exacted  for  failure  to  comply  with  the 
foregoing  and  other  requirements  of  the  law. 

Proper  Government  officials  are  authorized  to 
conduct  examinations  and  to  make  such  in- 
vestigations as  may  be  deemed  necessary  to 
determine  the  truth  or  sufficiency  of  any 

24 


returns,  and  they  are  further  empowered  to 
compel  the  payment  of  the  tax  even  where 
there  has  been  a  failure  to  make  the  return. 

Executors,  and  in  some  instances  other  per-  Executors  and 
sons,  are  made  individually  liable  for  the  pay-  ulw^fofpaySent 
ment  of  taxes,  and  in  most  instances  the  tax 
is  a  lien  upon  the  gross  estate  of  the  deceased 
for  a  period  of  ten  years,  unless  paid  within 
that  time. 

Payment  of  the  Tax 

The  tax  is  due  and  payable  one  year  from  the  Tax  due  one  year 
date  of  death,  and  if  not  paid  within  180  days 
after  it  becomes  due,  interest  at  six  per  cent  is 
added,  running  from  the  date  such  payment 
became  due,  or  one  year  after  the  date  of  the 
death.  In  exceptional  cases  the  time  for  pay- 
ment is  sometimes  extended  upon  proper  appli- 
cation for  further  extension  to  the  Commis- 
sioner of  Internal  Revenue  at  Washington, 
B.C. 

If,  after  payment  and  upon  investigation,  it  is  increased  payment 
found  that  an  additional  tax  is  due,  the  same 
must  be  paid  promptly,  or  interest  at  the  rate 
of  ten  per  cent  will  be  charged. 

Rates  of  the  Tax 

A  sliding  scale  of  rates  is  established  by  law. 
At  page  28  appears  a  table  of  the  rates.  The 
method  of  computing  the  Federal  Estate  Tax 
is  illustrated  on  page  29. 


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27 


Table  of  Rates  on  Estates  of  Residents 

(Dying  after  Feb.  24,  1919) 

Under  Federal  Estate  Tax  Law 


Amount 
(after  deducting 

of  Net  Estate 
the  $50,000  exemption) 

Rate 

$      50,000 

1% 

Next 

100,000 

2% 

Next 

100,000 

3% 

Next 

200,000 

4% 

Next 

300,000 

6% 

Next 

250,000 

8% 

Next 

500,000 

10% 

Next 

500,000 

12% 

Next 

1,000,000 

14% 

Next 

1,000,000 

16% 

Next 

1,000,000 

18% 

Next 

3,000,000 

20% 

Next 

2,000,000 

22% 

Above 

10,000,000 

25% 

It  is  understood,  of  course,  that  the  above  rates  are  cumulative, 
so  that  a  net  estate  of  $250,000  would  pay  1%  of  $50,000  plus  2% 
of  $100,000  plus  3%  of  $100,000,  or  a  total  tax  of  $5,500. 


Method  of  Computing 
the  Federal  Estate  Tax 

The  method  of  computing  the  tax  may  be 
illustrated  thus :  John  Jones,  a  resident  of  the 
United  States,  died  after  February  24,  1919, 
leaving  a  gross  estate  the  total  value  of  which 
was  $1,517,800. 

The  tax  in  this  case  would  be  calculated  in  the 
manner  following: 

Total  gross  estate $1,517,800 

Specific  exemption  allowed 

bylaw $50,000 

Other   deductions,   funeral 

expenses,  court  costs,  etc.        800 

Total  deductions . .  50,800 


Total    net    estate,    the    value    on 

which  tax  is  figured  ...........   $1,467,000 


$  50,000  SfSay87:000  1%  or  $      500 

The  next  100,000  ?s^$At67:000  2%  or  2,000 

The  next  100,000  SfSsJ1^:000  3%  or  3,000 

The  next  200,000  ?s^e$At67:000  4%  or  8,000 

The  next  300,000  f^At67:000  6%  or  18,000 

The  next  250,000  SftaJ1^:000  8%  or  20,000 

Remaining  467,000  SfSft!87:?00  10%  or  46,700 

Total  Net 
estate  $1,467,000  Total  Tax  $98,200 


29 


BLYTH.  WITTER.  &.  Co, 

D.  8.  GOVERNMENT.  MUNICIPAL  AND  CORPORATION  BONDS 

521  Trust  and  Savings  Building 

Cor.  6th  and  Spring  Sts. 

Los  ANGELES 

Merchants  Exchange  61  Broadway  Alaska  Building 

SAN  FRANCISCO  NEW  YORK  SEATTLE 

First  National  Bank  Bldg.  Chamber  of  Commerce  Bldg. 

SAN  DIEGO  PASADENA 

Yeon  Building  Easton  Building 

PORTLAND  OAKLAND 

6404  Hollywood  Blvd. 
HOLLYWOOD 


YOUN6   «   M'CALLISTER.  INC..  L.  A 


